MiFID II Definition
MiFID II or Markets in Financial Instrument Directive II is the framework of rules and regulations that apply to the security market in the European Union to secure and enhance the confidence of investors and safeguard their investment by ensuring transparency of the records.
- Markets in Financial Instruments Directive covers almost all the securities of the financial industry like shares, debentures, derivativesDerivativesDerivatives in finance are financial instruments that derive their value from the value of the underlying asset. The underlying asset can be bonds, stocks, currency, commodities, etc. The four types of derivatives are - Option contracts, Future derivatives contracts, Swaps, Forward derivative contracts. , currencies, etc. it focuses more on the transparency of the records by the companies issuing securities to convey the proper information to the investors.
- The aim behind the MIFID II Framework is to protect the investor’s fund and encourage investments. As the name suggests, Markets in Financial Instrument Directive II is the directive of the trading processes to be kept, information to be disclosed, rules to be followed, documents to be submitted, etc. it guides on transparency requirements and verifies the same. It also provides directives to the intermediaries of securities dealers. It brings the harmonized framework for all.
- The Original Markets in Financial instruments focus only on Equity instruments. And after the financial crisisFinancial CrisisThe term "financial crisis" refers to a situation in which the market's key financial assets experience a sharp decline in market value over a relatively short period of time, or when leading businesses are unable to pay their enormous debt, or when financing institutions face a liquidity crunch and are unable to return money to depositors, all of which cause panic in the capital markets and among investors. of 2008 due to heavy loss to the investors, the European Union has realized that there is a loophole in the system as it focuses only on equity.
- Then after research, Markets in Financial Instrument Directive II was introduced in 2018 which covers all the instruments like equity, debentures, currencies, derivatives, futures, optionsOptionsOptions are financial contracts which allow the buyer a right, but not an obligation to execute the contract. The right is to buy or sell an asset on a specific date at a specific price which is predetermined at the contract date., commodities, etc. and aim behind the introduction of MiFID II is to harmonize the system of dealing and bring back the confidence of investors by better transparency and guidelines for rules and framework to be adopted.
- It also issued the guidelines for intermediaries and also for dealings with business organizations outside the European Union. It strict the rules and regulations and enhance the legal formalities and submissions so that transparency should be maintained.
Objectives of MiFID II
#1 – Enhance the Confidence and Protect the Interest of Investors
After the 2008 Financial crisis, there is a heavy loss to the investors, and investors’ confidence starts decreasing, and market investment decreases. Hence in 2018, to boost up the market investment, the MIFID II introduced, which focuses on investors’ protection.
#2 – To Bring Transparency in Dealings
The objective behind the issue of Directives was also to bring transparency in dealings so that the chances of loss by investors become low and increase the confidence of investors.
#3 – To Issue Proper Directions and Instructions
To bring harmonization of the framework and structure by all the organizations, the European Union has issued the guidelines and instructions for the organizations and intermediaries so that they can get clarity about how to maintain and publish the records.
#4 – To Increase Market Volatility and Encourage Investment
The MiFID II aimed to encourage investment by providing proper and transparent information to the investors to decide whether to invest or not and measure the risk. It also aims to increase volatility in the market.
#5 – Other Objectives
- To make a strong and responsible financial system
- To issue guidelines for dealing with organizations outside the European Nations.
- Safeguard the investors’ fund
- Establish a transparent legal framework
- Providing better services to the investors’
How Does it Work?
- MiFID II has extended the scope to cover all the securities to increase transparency. Due to increased transparency, the security issuers start to maintain the proper data and returns. So, investors’ confidence increases due to increased legal framework and better transparency, and due to this, money floats in the market.
- Also, due to proper guidelines to the intermediaries’ people who have basic knowledge of investment had started investing through intermediaries. And due to this over the counter trading got reduced and, in the case of private trading, also reduced.
- Speculations in the market also reduced as the directives focus on the most volatile securities to control the speculations. Due to the introduction of MIFID II, frauds also gets reduced due to heavy penalties.
Key Aspects of MiFID II
The key aspects are as under:
#1 – Increased Reporting and Transparency
Reporting of important transactions increased considerably due to new directives which focus on investors. Also, the directives emphasize reporting of all transactions, whether with the European Union or outside the European Union. Dealers are also required to maintain every detail of the client.
#2 – Investors’ Protection
The main focus of this directive is to re-gain the investors’ confidence; hence investors’ fund safety got the utmost priority under the new rules.
#3 – Common Framework
MiFID II has provided a common framework for all the organizations and intermediaries to make the comparison of the financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels. easy and understandable.
#4 – Increased Legal Framework
The key aspects of the MIFID II are to make more reporting of the transactions and the key decision to the authority to prevent the investor’s fund and reduce the fraud and misuse of funds. The more legal interference put the hold on all illegal and unlawful activities.
Why is it Being Implemented?
- To increase the transparency and record-keeping of the transactions and reporting.
- To reduce the private trading and over the counterOver The CounterOTC markets are the markets where trading of financial securities such as commodities, currencies, stocks, and other non-financial trading instruments takes place over the counter (instead of a recognized stock exchange), directly between the two parties involved, with or without the help of private securities dealers. trading.
- To bring transparency in the dealing price.
- To enhance the interest of the investors.
- To control on speculative transactions.
- To catch the market players and influencers.
- To legalize and record the dealings.
- Investment by investors increased due to transparency and a better legal framework.
- Unnecessary speculations reduced;
- Unlawful activities by organizations come to an end due to the interference of the legal framework into a transaction.
- The dealers got the proper guidance on the record maintenance and recording of transactions.
- The regular high volatility in the prices got controlled and reduced.
- Over the counter trading and private trading also reduced and became more transparent.
Markets in Financial Instrument Directive II were introduced in 2018 to bring transparency in the reporting while dealing with the securities market. The original financial instrument directives got revised to MiFID II as the original MiFID only covers the equity securities, and after the financial crisis in 2008, the European Union realized the importance of including all the securities; hence MiFID II covers all the securities like derivatives, futures, options, etc.
Due to the introduction of MiFID II, the system of reporting got more transparent, and the legal interference and requirements also increased. Due to this, money flows in the market as the investor’s confidence increases due to high legal interference and transparency. The speculative transactions also got controlled. Over the counter trading and private trading also reduced due to more transparency.
This article has been a guide to MiFID II and its definition. Here we discuss how Markets in Financial Instrument Directive II work along with objectives, key aspects, its impact. You may learn more about financing from the following articles –